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Lord of These Things

Icahn’s critique didn’t win the day, but it remains the public template for whatever options Bewkes might have to deconglomeratize the company further. “Making the company smaller, in my mind, wouldn’t be a bad thing,” says a longtime executive from a rival media company. “Also cutting corporate overhead. They run heavy-duty. Time Warner is a place that has built up a lot of bodies.”

But mostly he just has to make a move. “He knows he’s doomed if he doesn’t do something,” says the executive. “I don’t believe that there are that many clever options that people haven’t already thought about or discussed.”

A prominent media investor, with whom Bewkes occasionally shares his thinking, says, “I think Jeff has a very strong view about where the company should be going, and he gets very frustrated with the lack of strategic policy in recent years. I think he can’t wait to get his shot at reshaping the company.” For instance, this analyst says Bewkes believes Parsons was far too accommodating to Icahn during the proxy fight of 2005–6 and wasted resources on the stock buyback (with no sustained impact on the price)—money that could have been better spent making a strategic Internet acquisition, much as Rupert Murdoch did when he bought MySpace for News Corp. “They might have bought a MySpace or a DoubleClick or an aQuantive, or bought two or three of those companies and had a much stronger inherent growth engine. Instead, money was foolishly squandered … Jeff thinks Dick got rolled.”

But Edward Adler, the Time Warner executive vice-president for corporate communications, says, “This characterization of Jeff’s opinion of our share-repurchase program is completely off base. Jeff strongly believed in the stock buyback throughout the Icahn period.” He points out that, during the accelerated buyback, the company made “more than $15 billion in strategic acquisitions including Adelphia, Court TV (now truTV), Claxson TV stations, and the companies that now make up the core of AOL’s Platform-A advertising business with Adtech, Tacoda, Lightningcast, Third Screen Media, and Quigo.”

In any case, Bewkes’s choices are both limited and terrifically complex. Each alternative sets off a dizzying series of tax, debt, and strategic implications, all while trying to anticipate where to invest for growth. And who knows? After all, the AOL deal was supposed to be a way to drive Time Warner’s media properties into the digital age, while driving AOL’s subscribers into the world of broadband access through Time Warner’s cable. Seemed like a great idea at the time.

“He knows he’s doomed if he doesn’t do something,” says a longtime rival media executive. “I don’t believe that there are that many clever options that people haven’t already thought about or discussed.”

The most obvious of the much-discussed possibilities might be selling AOL’s remaining subscriber business. This is, after all, where the trouble started: The dominance of the service in 1999 is what propelled the merger in the first place. Today, it depends on a dwindling number of subscribers who prefer the simplicity and security of access through AOL.com (including e-mail), though it’s been converted to a free, ad-based portal.

The other AOL Internet properties are doing better. Time Warner owns MapQuest, Moviefone, the gossip and Web-video site TMZ, and dozens of blogs. Still, after initial ad-revenue growth of 40 percent in 2006, AOL’s revenues have started to flatten.

Another of AOL’s synergies with Time Warner was to sell subscriptions to Time Inc. magazines, and capitalize on their formidable journalism brands. But despite having successful Websites like People.com, Golf.com and FanNation.com, and selling more print ads than any other company, Time Inc. is struggling with a post-print future. The media investor notes, “I think his druthers over time is to put a bunch of debt into Time Inc. and spin off what is basically a nongrowth asset.” But the problem with unloading Time Inc. is that the tax hit would be enormous.

As for Bewkes’s plans, the analyst says, “What he should do and what he will do is spin off cable. I think that’s his first priority.” The mammoth distribution business accounts for about a third of the company’s net income but will inevitably require billions in capital outlays as it faces stiffening competition from the telecoms and satellite providers. In any case, many analysts on Wall Street have long since given up on the idea that the integration of content and distribution is a surefire path to success in the media business.

In some scenarios, Time Warner could just end up being a movie studio and cable-television company: an all-Hollywood entity, and a very large and successful one at that. Which could set off another big deal. It could be combined with NBC Universal, which is owned by General Electric, either in partnership or sale.

Reports in the business press have it that G.E. might put NBC Universal on the block after the 2008 Olympics. But the dealmakers of Wall Street also seem intrigued by the possibility of G.E.’s buying a future cable-free version of Time Warner. As another well-known media investor put it, “There’s two big studios, which fit nicely. If you look at a lot of NBC’s hit shows, they come from Warner Bros. Television anyway.” The only big overlap would be with CNN and MSNBC. But both have strong Internet businesses.